Lenders routinely require that financed commercial real estate is insured against certain causes of damage or loss. Should a borrower fail to meet this obligation at any point, the lender may choose to purchase force-placed insurance for the property.
Force-placed insurance normally provides specialized coverage for a lender’s stake in a financed property. Policies are readily available for most types of commercial real estate.
Lenders may use lender-placed insurance when a borrower fails to maintain a loan’s minimum coverage requirement. Getting coverage may help protect the lender’s financial stake in the property.
Lender-placed coverage is available for both residential and commercial properties, but it’s especially important when commercial properties are financed. Many commercial properties have higher sale prices, which can leave lenders exposed to increased losses if a property is damaged without insurance in place.
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Lenders must adhere to strict requirements when getting lender-placed insurance for a financed commercial property.
First, lenders should confirm that the terms of the property loan allow the lender to pursue lender-placed coverage. The vast majority of commercial property loans normally do, but this should still be confirmed beforehand so that the lender isn’t accidentally exposed to potential action by the borrower.
Second, lenders normally have to adhere to certain federal requirements. The normal process is to give the property owner a 45-day notice, during which time they may obtain adequate insurance. There is then a 15-day reminder that usually must also be issued.
Should the property owner fail to secure adequate insurance by the time the waiting period is over, the lender is typically free to get force-placed coverage for the property.
Because there are specific legal requirements to follow, lenders should consult an insurance agent who specializes in lender-placed policies before actually purchasing one. Lenders might also want to have an attorney, either in-house or outside counsel, review the situation.
Lender-placed insurance typically covers certain risks that are fundamental to protecting the lender’s interest in a financed commercial property. Exactly what risks are covered depends on the specific policy, but often include perils like:
An insurance agent who understands commercial lender-placed policies well can review what specific perils a given policy would cover.
In California and certain other states, earthquakes are a major concern. Earthquakes usually aren’t one of the standard perils that lender-placed policies typically cover, however.
If earthquake coverage is needed for a commercial property in California or elsewhere, an insurance agent who’s well-versed with lender-placed coverages likely can help find a policy that has this protection.
The cost of the lender-placed coverage is typically passed onto the property owner, with lenders often adding the premiums onto the property owner’s monthly loan payment. Premiums can usually continue to be passed on until a property owner obtains the coverage they’re required to have.
When a property owner obtains the requisite coverage, lenders often have to cancel the lender-placed policy within 30 days. Any excess premiums normally must be remitted to the property owner within this time frame, as well.
Since the coverage afforded by a force-placed policy primarily protects the lender, the lender usually files any claim. The claim is filed with the insurance company, following that insurer’s standard process.
Filing a claim against a force-placed policy is something that an experienced insurance agent can assist with.
If you’re a lender and need force-placed insurance for a commercial property, contact us at QuieTrack Insurance Services. Our agents understand the importance that force-placed coverage can have for commercial real estate that’s financed. We’ll make sure you find a policy that’ll keep your interest in a financed property protected well.